House-Senate Conference Committee for the Tax Cuts and Jobs Act, H.R.1

Recommendations for the

United States Congress

House-Senate Conference Committee for the

Tax Cuts and Jobs Act, H.R.1

Wednesday, December 13, 2017, 2:00 P.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairmen Brady and Hatch and Ranking Members Neal and Wyden, thank you for indulging us as frequent commentators for the record in one last set of suggestions to the Conference Committee on H.R.1.

This is not the tax reform bill we had hoped for. Frankly, the path negotiated during the Obama Administration enacted under the American Tax Relief Act and The Budget Control Act were adequate to give us our current economy, which is improving, albeit too slowly for workers.

We are on record predicting that enactment of the Fiscal and Job Cuts Act (not a typo) will restrict wages and cause other labor cost savings so that executives can cash in on the lower tax rates by earning higher bonuses, so that any economic gains (and growth could come faster) would be from deficit spending.

Countering with budget cuts, particularly to seniors, the disabled and the poor, both worthy and unworthy, will lead to the proceeds of these tax cuts being used for the kinds of assets that lead to boom and bust cycles, most recently the 2008 Great Recession.

We believe that the economy can do better and that some tax cuts are better than others, although entitlement reform is best pursed inside of a tax reform that contains a subtraction value added tax/net business receipts tax (NBRT), where certain entitlements can be shifted to employers in lieu of paying a portion of the tax, with this encouraging both employment and participation in training programs in order to have access to social services.

These deduction and credits could include everything from the last two years of undergraduate and graduate education to a more robust child tax credit to health care reform that encourages hiring medical staff directly (thus matching the incentive to cut cost to the ability to do so) to retirement savings in lieu of Social Security, although the savings should be in the form of employer voting stock rather than unaccountable index funds run from Wall Street. These reforms can be hammered out next year or in the next Congress, but the right tax to hold them is clearly the NBRT.

Aside from the short term economic benefit to workers from not giving CEOs an incentive to cut labor costs, we remind the Committee that in the future we face a crisis, not in entitlements, but in net interest on the debt, both from increased rates and growing principal. This growth will only feasible until either China or the European Union develop tradeable debt instruments backed by income taxation, which is the secret to the ability of the United States to be the world’s bond issuer.

The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. That means that for every dollar you pay in taxes, you owe $10.55 in debt. People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands.

The answer is not making the poor pay more or giving them less benefits, either only slows the economy. Rich people must pay more and do it faster. My child is becoming a social worker, although she was going to be an artist. Don’t look to her to pay off the debt. Your children and grandchildren and those of your donors are the ones on the hook unless their parents step up and pay more. How’s that for incentive?

This proposal contains no analysis of the last minute cost savings measures, such as repealing the interest deduction on student loans or counting tuition waivers as imputed income or the loss of the medical expenses tax. If the Byrd Rule can be avoided by bipartisan action, these provisions should be stricken from the bill. They seemed like a dare to Senator Sanders to run again. Be careful what you wish for.

Let us work toward a plan to attract large enough bipartisan majorities to end concern over the Byrd Rule. Democratic donors will be fired up whether they get a tax cut or not, so refusing to deal just to monopolize the donor class will not work. Now that I have adequately offended and preached to the majority, let me now provide you with assistance in passing this bill.

We offer two scenarios at a high level, both target and range values. Their budgetary impact has not been estimated recently and their target is not a balanced budget at this time, alth0ugh one could be achieved by adding a 13% goods and services tax and a higher income surtax. Until a more robust growth rate is achieved, possibly triggering some wage inflation, balance is not recommended at this time, although it must come soon.

The difference between the two proposals is that consumption taxes will allow the income tax rates to go down and the standard deductions to go up, because most labor is already taxed. The end of the corporate income tax also eliminates the rational for separate dividend and capital gains rates.

If Congress has the will, it can limit the number of industry specific subtraction value added tax breaks. Whether these are retained for a goods and services tax can be determined later. It is harder to demand a tax break on profit to fund labor intensive activities when that tax also covers the labor of those researchers. Additionally, consumption taxes limit the overlap between labor and capital impacts essential to the corporate profits tax.

Finally, lower effective rates will result in the SVAT/NBRT if all of the entitlement reforms discussed above are undertaken. Indeed, the tax could be designed to go to almost zero (provided a goods and services tax were enacted for discretionary civil and military spending, which could be zero if that spending stopped, as could the income tax if the debt were minimized or eliminated.

           

Scenario One: No consumption tax

Standard Deduction:           $20,000 single, $40,000 joint

Income Tax:                          13% to $80,000, 26% to $180,00, 39% single

                                                13% to $110,000, 26% to $240,000, 39% joint

Child Tax Credit:                  $6000 per child ($500 paid monthly by Treasury)

Inflation:                               Chained CPI applies to SD, brackets and CTC

Social Security:                    Unchanged

Pass Through Rate:             26% (range 24% to 28%)

Corporate Income Tax:       26% (range 24% to 28%)

Dividend Rate:                     26% (39% during repatriation)

Capital Gains Rate:              26% (39% during repatriation)

Inheritance Tax:                  Asset liquidations counted as normal income, taxable after

26% rate and above

Estate Tax:                            Repealed immediately

Scenario Two: Consumption tax included

Standard Deduction:           $50,000 single, $100,000 joint

Subtraction VAT:                 31% before deductions and exclusions

Border Adjustment:             VAT Reduced to 13%, 13% VAT added to imports

Social Security:                   

Employee:                 OASI Unchanged, Disability, Health, ACA to SVAT

Employer:                 Moved to Subtraction VAT, Credited equally

Corporate Income Tax:       Repealed

Pass Through Rate: Repealed

Income Tax:                          13% to $130,000, 26% single

                                                13% to $210,000, 26% joint

Dividend Rate:                     Normal Rate

Capital Gains Rate:              Normal Rate

Inheritance Tax:                  Asset liquidations counted as normal income, taxable after

26% bracket

Estate Tax:                            Repealed immediately

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.